What is the difference between not-for-profit and tax-exempt status?

Non-profit status is a state law concept. Non-profit status may make an organization eligible for certain benefits, such as grants, state sales, property, and income tax exemptions. Although most federal tax-exempt organizations are non-profit organizations, organizing as a non-profit organization at the state level does not automatically grant the organization exemption from federal income tax. To qualify as tax-exempt from federal income taxes, an organization must meet requirements set forth in the Internal Revenue Code.

Are churches required to apply for exemption from federal income taxes?

Churches that meet the requirements of of IRC section 501(c)(3) are automatically considered tax exempt and are not required to apply for and obtain recognition of tax-exempt status from the IRS. They are automatically classified as tax-exempt.

Although there is no requirement for churches to do so, many seek formal recognition of tax-exempt status from the IRS because such recognition assures church leaders, members and contributors that the church is formerly recognized as exempt and qualifies for various grants and related tax benefits. For example, large contributors donating big endowments and major corporations prefer giving to a church that has been formerly recognized by the IRS as tax exempt to ensure their contributions are tax-deductible.

Are churches exempt from paying sales tax in the state of Georgia?

No exemption from paying sales tax is granted to churches, religious, charitable, civic and other non-profit organizations. They are required to pay the tax on all purchases of tangible personal property. Further, when such organizations engage in selling tangible property at retail, they are required to comply with provisions of the Act relating to collection and remittance of the tax. Ga. Code Ann., 560-12-2-.22 (This exemption varies from state to state).

All board approved salary and monies distributed to or on behalf of the duly ordained minister from the organization is considered as taxable income that must be reported for income tax purposes. Federal income and state tax withholdings are voluntary deductions from their salary. Although these are voluntary, they are responsible annually for SECA taxes on board approved salary, housing allowance and outside honorariums. Un-used housing allowance is taxable for federal income tax purposes.

Are all non-profit organizations tax exempt and may all donations given to them qualify as a charitable deduction?

Unlike churches and religious organizations, non-profit organizations that wish to be tax exempt generally must apply to the IRS for tax-exempt status. Donations are tax deductible if given to a "qualified" tax exempt organization. A qualified organization is one who has obtained 501(c)3 recognition from the Internal Revenue Service.

What income is subject to Unrelated Business Income Tax (UBIT)?

Churches and religious organizations, may engage in income-producing activities unrelated to their tax-exempt purposes, as long as the unrelated activities are not a substantial part of the organization's activities. However, the net income from such activities will be subject to UBIT if the following thru conditions are met:

the activity constitutes a trade or business,

the trade or business is regularly carried on, and

the trade or business is not substantially related to the organization's exempt purpose.

Even if an activity meets the above three criteria, the income may not be subject to tax if it meets one of the following exceptions:

substantially all of the work in operating the trade or business is performed by volunteers;

the activity is conducted by the organization primarily for the convenience of its members; or

the trade or business involves the selling of merchandise substantially all of which was donated.

In general, rents from real property, royalties, capital gains, and interest and dividends are not subject to UBIT unless financed with borrowed money.